Small Business Enterprise: An Economic Analysis.

The role of small business in modern industrialized economies has attracted a great deal of attention in recent years, particularly in light of the high failure rate of new firms. Gavin Reid provides a comprehensive industrial organization based analysis of this important issue. His book analyzes small business enterprise with particular emphasis on the firms' formative stages. A variety of interesting topics ranging from scale economies to the strategic pricing techniques employed are examined. The book is divided into six major sections, each section highlights a different aspect of small business enterprise and the appropriate research tool and data required for analysis.

The first section contains an introductory chapter, which highlights the growing importance of small business enterprise in industrialized economies, and a second chapter which outlines the extensive small business database (over 40,000 data points) used throughout the book. Unlike many areas of economics, data on small business enterprise is not often readily available in usable form. The very nature of small business enterprise frequently forces a researcher to collect primary data. Hence one of more appealing features of the book is the use of this small business database and the author's careful documentation of the associated interviewing instruments and questionnaires in the appendix. The data base is also of interest because it is "relational." Relational databases use a non-hierarchical data structure and can include qualitative as well as quantitative data. Moreover, relational databases impose few restrictions on the data structure which allow analysts more freedom in exploring hidden relationships.

The second section of the book, comprised of chapters 3, 4, and 5, contains the basic statistical analysis of small business. Chapter 3 provides a brief look at the "typical" small business enterprise in terms of its fundamental characteristics. This sets the stage for the more rigorous statistical analysis applied in subsequent chapters. For example, chapter 4 analyzes both static and dynamic economies of scale. Interestingly, although the evidence for dynamic increasing returns is weak, Reid finds strong support for short-run economies up to capacity. This suggests that even relatively small firms may be able to exert market power due to significant cost barriers to entry.

It should be noted, however, that the dynamic economies examined here were not learning-by-doing economies based on cumulative production but instead were economies based on percentage changes in yearly output. It would be interesting to see more formal evidence on the level of learning economies in small business since studies using data from relatively large firms have suggested that learning economies are often an important element. Indeed, in a later chapter Reid notes that learning appears to be important for young small business enterprises.

The third section contains a number of interesting case studies. In particular, chapter 6 provides an in-depth look at seven small businesses. The firms range from 2 to 24 employees, while their output ranges from printed circuit boards to building and carpet cleaning services. These illustrative case studies provide much insight into the inner workings of small firms. These enterprises are examined again in chapter 7 in terms of their relationships with other firms (defensive and competitive strategies). The case evidence here suggests that small firms primarily use "competitive" growth strategies, such as product differentiation, rather than more defensive entry deterring strategies. This is perhaps due to the relatively low commitment ability of many small firms and certainly warrants a more in-depth analysis. The final chapter in this section then applies the more traditional structure-conduct-performance approach to these cases to illustrate the importance of rivalry among incumbent small business enterprises.

The next three chapters (9, 10, and 11), which comprise section four, provide a comprehensive cross-sectional econometric analysis of small business enterprise. The econometric models in this section are well grounded in economic theory. Indeed, one of the more interesting aspects of this part of the book is the use and test of a game-theoretic model. Chapter 10 uses a price-setting extensive form game as the basis for conducting tests on rival firms' expected price reactions or responses. In particular, the analysis finds evidence of price asymmetries (i.e., small firms conjecture that rivals will respond differently to price increases than price decreases). This suggests that a modified form of kinked demand curve model may be more appropriate for modeling small business than typical Bertrand models, since Bertrand conjectures are symmetric with respect to increases or decreases in price.

The empirical test of this game-theoretic pricing model is a good start but it is somewhat incomplete since it is still an open question whether firms primarily set price or quantity, or perhaps even choose a price-quantity pair with rationing. Experimental evidence suggests that Cournot type equilibria are often observed. In addition, extensions of Hotelling's famous location model indicate that kinked demand curves may be due to locational or spatial effects which were not addressed in the analysis. It would be interesting to see how the locational decisions of small enterprises are determined and how these decisions subsequently influence the firms' pricing strategies and conjectures.

The fifth and sixth sections of the book (containing chapters 12, 13, and 14) are brief and provide some relatively informal evidence on the "political economy" of small firms and directions for future research. Chapter 12, for example, argues that owner-managers do not appear to have any ethical or moral misgivings about gaining a competitive edge over rivals.

In summary, I enjoyed reading the book and found it shed light on many issues dealing with small business enterprise in industrialized economies. The rigorous use of modern economic industrial organization theory and econometric analysis is its most appealing feature. As with any undertaking one could always argue that there are gaps in the analysis (e.g., no chapter focusing on the locational or spatial aspects of small business), but on the whole the book was impressive.

Gregory E. Goering University of Alaska